A word on rent reviews

A word on rent reviews

22/09/2016

There is a smile back on the faces of many commercial landlords, particularly in the industrial and office sector. As demand remains good and supply diminishes, rents have risen, and this has led to the return of the rent review (of course, they never actually went away but with little ammunition to prove increase, they have often been uncontested by landlords and settled without any uplift).

With rent reviews generally on a five-year cycle, timing is crucial. It remains a one-off opportunity to seek a rent increase, and whilst a rent review can often be implemented in the months leading up to a the review date, and at any time after, the date remains the same. Indeed, in an improving market, there is little incentive for a landlord to initiate a review until after the due date.

In some markets the increase in rents has been significant over a five year period. The office market for grade A accommodation in St Albans has seen headline rents increase from low to high £20s per sq ft in this period, and there are similar signs now in the Watford office market. The improvement in industrial/warehouse rents have also improved significantly for the better quality stock, with ‘double-figure’ rents and this trend is far less localized.

Every commercial landlord should know the importance of the word ‘headline’. When considering the effect of a reported rental transaction, a landlord will be more interested in the ‘equivalent’ or ‘underlying’ rent. This is the level of rent that has actually been achieved having deducted the benefit to a tenant of rental incentives or concessionary rents. For example, an office letting at a headline rent of £25 per sq ft with a 9-month rent free for a term certain of five years, would generally be considered to show an equivalent rent of £22.50 per sq ft.

Landlords will also have to consider the potential positive and negative implications of the clauses within the lease, and these can have a marked effect on rental value. These may relate to the permitted use, alienation, and lease length, for example, as well specific assumptions and disregards within the rent review clause. To illustrate, if the lease contains a ten year assumed term, and the most direct rental evidence is on five year terms, the evidence will usually warrant a negative adjustment to allow comparison.

Therefore the message to landlords is look (or take advice) before you leap!